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Jeff Cooper: Welcome to the Whip Chainsaw Massacre


The market is tracking the pattern from 1987 and appears to be in a precarious position.

There is nothing more deceptive than an obvious fact.
-Sherlock Holmes

In a bull market, you don't need analysts. In a bear market, you don't need stocks.
-Doug Kass

This week has been no run of the mill whipsaw.

It's been a chainsaw massacre.

On Thursday, the S&P 500 fell just over 2% in the worst day in 6 months, entirely offsetting Wednesday's 2% rebound.

Wednesday's large range outside up day in the SPX was just shy of declining below Wednesday's low, leaving a bearish Reversal of a Reversal signal.

The index was rejected on Wednesday from a backtest of a trendline connecting the February and August lows.

Additionally, the drop confirms what looks like a quite bearish drooping right shoulder. A break of the double bottoms/neckline just above the 200 day moving average projects a move toward 1800.

As you know, the market is tracking the pattern from 1987 when the SPX snapped double bottoms and gapped below its 200 dma.

Crashes are rare birds, but if one is going to play out, the likelihood is it happens within 7 to 8 weeks off the high.

The SPX is in a dangerous position, snapping an ascending wedge for 2014.

Of course, over the last 5 years, investors have learned to sit tight and not give into fright.

After the technology bubble burst in 2000, investors got slammed for chasing stocks, but the market came bouncing back like a ball under water.

Then in 2008, stocks got demolished as an even worse debacle hit.

But again, as the smoke cleared, stocks roared back.

And, as my trainer said to me yesterday after learning stocks were down hard again, "It's okay to hang onto stocks here if they go lower... if we don't need the money right now and we're not retired, they'll come back, right?"

Well that'sthe thing about the markets... time is money, though most consider price money.

As W.D. Gann stated, "Time is more important than price."

It's all about the holding period and when one needs the money.

For example, if a 65-year old put her savings in the market 1929, she had a big problem -- it took 25 years for the DJIA to set new recovery highs!

The Nikkei made a high in late 1989 and has still not come close to making a new recovery high.

Wall Street weans investors on the milk of Buy & Hold yet it tells you that great corrections are buying opportunities, and a time to break out shopping lists.

However, if one buys and holds and has not raised any cash, where does the dry powder come from?

We are told it's impossible to time the market and to dance in and out, but the vast majority of Wall Street money managers have huge turnover in their portfolios, so apparently, it's a matter of "do as I say, not as I do."

Dancing in and out is best left to those watching the market day by day, but timing major swings and trends is quite another.

Why should investors ride their holdings all the way down without the benefit of an 'uncle point'?

Why shouldn't an investor peel out of a piece of a stock position that goes vertical?

Granted, while market timing is a Medusa, it seems to me there is a time to buy and a time to sell. To take advantage of market corrections, on whatever timeframe, one must have raised some cash.

The concept of a stop loss isn't rocket science, unless you worship at the shrine of Buy & Hold.

The point is, dyed in the wool bulls tell you to buy on weakness, but do they ever tell you to sell?

After the losses in recent weeks, do their clients have any cash to deploy?

Months ago, my work pointed to a confluence of factors [subscription required] indicating the potential for an October debacle that could see as much as a 20% pullback over a relatively short time period (as in 7 to 8 weeks from high).

One factor in making that call is that this October is 85 years from the great October 1929 crash. On the Square of 9 Chart, 85 aligns with October 4th.

Click to enlarge

On the very first trading day of October, the SPX plunged below its 50 day moving average. It was a harbinger for the poor price action to follow.

October 4, 2014 was a Saturday. On Monday October 6, the SPX set up its first Minus One/Plus Two sell signal since its all-time high on September 19.

Why? The 3 Day chart was pointing down (the Minus One part of the pattern) and the index had traced out two consecutive higher daily highs into October 6 (the Plus Two part of the pattern).

The ensuing action was conspicuously bearish with the SPX plunging 30 points the next session.

That said, the SPX held the key 1931 level -- key because it  ties to 180 degrees in price down from the 2019 all-time high.

Yesterday, the SPX closed below 1931, leaving the index vulnerable. Markets play out in 90 degree decrements. So another 90 degrees down from 1931 ties to 1887 (270 degrees down from high).

A full 360 degree revolution down from the high ties to 1843. Interestingly, this ties to the opening range of the year at 1849, proving the geometry of the market and the power of the Square of 9 as 2019 was 360 degrees UP from the opening range of the year.

Conclusion. The SPX has not had a 'normal' 20% correction, which is part of ongoing secular bull markets, since the 2009 low.

The closest it came was the 19.4% decline into October 4, 2011.

As you know, the 1074 low on October 4t, 2011 'pointed' to September 19.


Because 1074 is 90 degrees square the date of September 19 on the Square of 9 Chart.

Additionally, as flagged in this space a month ago, September 12 was 1074 days from the October 4, 2011 major higher low.

The NY Composite topped on September 4. The SPX topped on September 19. September 12 splits the difference.

So there were multiple time/price harmonics (cycles) occurring in September which are exerting their downside influence.

Fundamentals are nice but often get trumped by supply and demand and psychology.

Selling begets selling (and vice versa) until the narrative is settled on -- or at least until those who haven't settled on it have sold what they want to sell.

When confusion as to what narrative or nervousness is driving the markets is sorted out, techincals dominate.

So, the last 10% correction was in 2012 and we haven't actually had a 20% correction since 2009 -- though the 2011 decline was close enough for government work.

Now that the SPX has broken an 18-month ascending wedge and is threatening to close below that wedge on the important Friday weekly closing basis, the prospect for a 20% correction looms large.

After all, even within the context of a secular bull market beginning in March 2009, a backtest of the prior peak from 2007 around 1570 to 1600 would not be unusual. Such a backtest would satisfy a 20% correction. It's a matter of how quickly it would play out if it is going to do so.

The market is at the anniversary of the 2002 low and the 2007 high. We are 144 Fibonacci months from the 2002 bear market low.

We are 987 Fibonacci months from the major July 1932 post-crash low.

Risk is not just running high at this inflection point. It is raging.

Perhaps the market will make another historic October low. However, as 1987 proved, plus or minus a few days can be critical. Better to let the market tell its tale than attempt to catch a falling dagger.

As one very smart trader told me over a month ago:

"People have been buying bonds and other securities as if there is limited supply. They are also buying government securities that have very small returns in currencies that the central banks have declared they will devalue. Why are people doing that? I have tried to understand this for over 2 years and I have failed miserably to get a solid answer other than mass psychology and crowd behavior. The markets today have more in common with a hot craps table that may be turning cold than the efficient and rational allocation of capital."

Market participants may be herded into the notion of keeping their wallets on their hips until a 10% or 20% decline plays out and a fall storm has passed, but no one knows how low low is if panic truly grips the Street.

Twitter: @JeffCooperLive

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